On 20 February 1840, Foreign Secretary Lord Palmerston instructed the joint plenipotentiaries Captain Charles Elliot and his cousin Admiral George Elliot to acquire the cession of at least one island for trade on the Chinese coast, amongst other terms. In November 1840, during the First Opium War, George returned to Britain due to ill health, leaving Charles as sole plenipotentiary. Elliot and Imperial Commissioner Qishan underwent negotiations but to no agreement. To force Chinese concessions, the British captured the forts at the entrance of the Bocca Tigris (Bogue) on 7 January 1841, after which Qishan agreed to consider Elliot's demands. Negotiations ensued at the Bogue near Chuenpi. Qishan wrote to Elliot on 15 January, offering either Hong Kong Island or Kowloon but not both. Elliot replied the next day, accepting Hong Kong. On 15 January, trader James Matheson wrote to his business partner William Jardine that Elliot arrived in Macao the night before: "I learn from him very confidentially that Ki Shen has agreed to the British having a possession of their own outside, but objects to ceding Chuenpee; in lieu of which Captain Elliot has proposed Hong Kong".
Other terms that were agreed upon were the restoration of the islands of Chuenpi and Taikoktow to the Chinese, and the evacuation of Chusan (Zhoushan), which the British had captured and occupied since July 1840. Chusan was returned in exchange for the release of British prisoners in Ningpo who became shipwrecked on 15 September 1840 after the brig Kite struck quicksand en route to Chusan. The convention allowed the Qing government to continue collecting tax at Hong Kong, which was the main sticking point that led to the disagreement according to Lord Palmerston.
The forts were restored to the Chinese on 21 January in a ceremony on Chuenpi, which had been held by Captain James Scott as pro tempore governor of the fort. Commodore James Bremer, commander-in-chief of British forces in China, sent an officer to Anunghoy (north of Chuenpi) with a letter for Chinese Admiral Guan Tianpei, informing him of their intention to return the forts. About an hour later, Guan sent a mandarin to receive them. The British colours were hauled down and the Chinese colours were hoisted in their place, under a salute fired from HMS Wellesley, and returned by the Chinese with a salute fired from the Anunghoy batteries. The ceremony was repeated at Taikoktow. Military secretary Keith Mackenzie observed: "I never saw a man in such an ecstasy of chin chin , as he was, when our colours were lowered—he absolutely jumped for joy." Two days later, Elliot dispatched the brig Columbine to Chusan, with instructions to evacuate it for Hong Kong. Duplicates of these dispatches were also forwarded overland by the imperial express. At the same time, Qishan directed Yilibu, the viceroy of Liangjiang, to release the British prisoners at Ningpo. News of the terms was sent to England aboard the East India Company steamer Enterprise, which left China on 23 January. On the same day, the Canton Free Press published the opinion of British residents in China regarding the cession of Hong Kong:
We consider that, for an independent British settlement, no situation can possibly be more favourably chosen than that of Hong-Kong. The island itself is of little extent ... but it forms, with the neighbouring lands, one of the finest ports existing ... Hong Kong would, we doubt not, in a very short time, become a place of very considerable trade, were its possession by the British not clogged with the condition that the same duties at Whampoa are to be paid there; which, in our estimation, destroys at once all the benefits that might be expected to trade there.